When a company files for bankruptcy, all the relevant investors end up becoming concerned about its future. In the event of bankruptcy, several steps are followed while seeking to compensate all the parties involved. It is important to note that the law details how the assets of the firm will be shared. The first people to be paid are secured bondholders. This occurs due to several possible reasons. For instance, their money is secured by contract. The money may also be guaranteed. Correspondingly, the funds may be secured by collateral. In most cases, bondholders end up being offered a significant portion reflecting the value of their bonds upon the notification of bankruptcy. Bondholders are, however, expected to file a claim in order for them to receive cash payments in the event that they are available. This happens after they have received a notification of bankruptcy. Alternatively Bondholders may also be offered new stocks, bonds, or a combination of both in exchange for the bonds they had purchased previously.
It is further imperative to note that preferred stockholders receive compensation before common stockholders after bankruptcy occurs. Common stockholders end up being last in line of compensation after the occurrence. Besides, the common stockholders are not entitled to guaranteed dividends. As a result, the returns they are likely to get tend to be uncertain. Preferred stockholders are senior compared to common stockholders but end up being subordinate to bondholders in the event of making claims. For instance, a claim on their rightful share to the assets possessed by a company. Despite getting compensated before common stockholders, they have to wait for corporate bonds as well as other debt instruments to receive their compensation. Besides, in events where the company ends up missing the dividend payment, it is ends up being the first to cater for arrears to preferred stockholders as opposed to common stockholders.
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